February 19, 1999 1:55 PM PST

NEC falls on very hard times

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An antiquated business philosophy that just won't quit and years of miscalculations are now bringing one of Japan's corporate giants to its knees.

Reminiscent of the job slashing by U.S. computer giants in the 1980s, NEC said today that it would cut 15,000 jobs amid huge losses as it reels from the effects of a business model gone awry. Some of the most egregious mistakes include continued overexposure to memory chips--an industry that has been drowning in red ink--and the buy-out of a U.S. PC maker that was already fading by the time NEC took over.

It has been pummeled by domestic problems, plunging overseas sales and wracked by huge losses at its U.S. unit Packard Bell NEC.

The Japanese company said today it will post a loss of $1.25 billion this fiscal year. It also said it would institute a wide-ranging restructuring plan that includes the 15,000 job cuts, "shifting" personnel to more viable business operations, and a far-reaching study of its businesses.

Historically, NEC has been a pillar of the Japanese economy. It is Japan's top semiconductor manufacturer and leading personal computer maker. It pioneered the Japanese PC market with its proprietary "98" architecture, and in the '80s and early '90s it controlled over 50 percent of the Japanese PC market. But this situation is changing quickly as it continues to lose money in core businesses such as memory chips and as it watches its domestic market share in PCs slip away to Fujitsu, Apple Computer, and a host of overseas contenders. Its market share has dropped to below 30 percent, according to estimates by some market researchers.

Its predicament in the U.S. market may be even worse as Packard Bell continues to post large losses and to perform poorly against low-cost PCs from Compaq, Hewlett-Packard, and IBM. Ultra-low-cost PC makers such as Emachines are also taking customers that Packard Bell traditionally had.

Packard Bell losses widened to $500 million in 1998, from $487 million in 1997. NEC has poured over $1.3 billion into Packard Bell NEC.

Moreover, NEC has never excelled in the U.S. business market. Its notebook PCs, desktops, and servers have never had the brand-name drawing power of U.S. companies.

In Japan, NEC also said in a release that in fiscal year 1999 it would reduce plant and equipment investment by 20 percent and enact research and development "efficiencies" of 10 percent.

Further, there will be a restructuring of its manufacturing systems and it will step up outsourcing of production.

Along with losses, NEC said it will eliminate 15,000 jobs over the next three years. This includes 9,000 jobs in Japan and 6,000 positions overseas.

In the U.S. market, NEC today announced that it will reorganize Packard Bell NEC by "injecting cash" into its American operations and separating and promoting its European operations. In line with this action, NEC said that it would reorganize its personal computer and server operations into three, geographic legal entities:

  • Packard Bell NEC will be responsible for the Americas (the United States, Canada, Mexico, and Latin America) and will be led by Alain Couder as president and CEO.

  • Packard Bell NEC Europe will be responsible for all international operations outside of the Americas and Japan, and will be led by Michel Fromont as president and CEO.

  • NEC will continue to be responsible for the Japanese market.

    Despite NEC's Japan-based woes--which are significant--Packard Bell appears to be making a bad situation much worse. NEC's and Packard Bell's worldwide PC market share declined from five percent to four percent in 1998, said Ashok Kumar, an analyst at Piper Jaffray. "[Packard Bell's] brand equity isn't really worth anything anymore," he added. Market share loss can be particularly harmful since the company must ship an increasing number of computers to make money in the low-cost PC markets it competes in.

    "The problem for Packard Bell now is that they can't sell PCs for $500 or $600 and make money," said Van Baker, an analyst at GartnerGroup Dataquest. One of Packard Bell's fiercest competitors now is Emachines which has a business model subsidized to some extent by its South Korean owners, making it even more difficult for Packard Bell, he said. Upstart Emachines sells PCs for as little as $399.

    Packard Bell "established the low-cost PC market, then everybody went after them. Though they're still a force in the market, their business model isn't viable anymore," he added.

    In Japan, Senior Managing Director Kouji Nishigaki will replace Hisashi Kaneko as president. The appointment will be approved next week and take effect from March 26. "It's difficult to explain a company that used to be profitable has come to this: we need to accelerate a turnaround," Nishigaki said at a press briefing.

    The appointment of Nishigaki, who has specialized in computer systems integration, signals NEC's desire to focus more on network solutions to customers rather than on computer hardware alone, analysts said. Senior Executive Vice President Hajime Sasaki, who heads the company's microchip business, will become chairman.

    NEC said in Japan it is suffering especially from stagnant orders from Nippon Telegraph and Telephone, the world's largest phone company, for products such as switching equipment. Weaker demand for logic chips will add to the sales decline, the company said. Oversupply and plunging prices for dynamic random-access memory chips caused earnings to more than halve in the year ended last March, though, and are a significant reason for NEC's loss this year, its first in six years.

    Bloomberg contributed to this report.

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